What Can Go Wrong With Property Investments?

How can you head off disasters before they arise?

It’s important to understand the risk of your returns not meeting your expectations when investing into any asset – and, in the worst case scenario, of losing all of your money.

That means knowing before you commit your capital what could go wrong so you can take all the available steps to pre-empt those potential problems.

In the case of property investments, returns often rely on some kind of development of land or property that adds value to the original asset before sales or rental agreements are made. So there is a risk in one or more of those processes going wrong. If you’re dealing directly with developers when this happens, you could be left feeling helpless.

However, if you have invested through a property investment platform, they should have already put controls in place to mitigate problems as they arise or to head them off completely. If not, you can always ask them to put the points below in place.

So what can a property investment platform do to mitigate risk?

Due diligence

Before even hosting an opportunity for investors, a reputable platform will have done its due diligence on the project and the people involved. This involves ensuring the potential partner has a good track record, reputable directors and is working with high quality contractors. You should understand the types of risk and the potential impacts – such as what would happen if planning permission is not achieved. Ensure these risks are explained carefully to you. There may be investment covenants such as maximum Loan To Value ratios for loans when funding any development projects to ensure they are not over-leveraged. You could even insist on a Personal Guarantee from a director at the development company.

Manage your money properly

Once you have committed funds to development projects, good platforms will hold your cash in escrow until it is invested, often using e-money services, like Mangopay. This means no individual or organisation can bank those funds until that investment has been made. Once invested, funds can be held in Special Purpose Vehicles (SPVs). An SPV is a type of limited company that is created to segregate assets such as individual developments. This creates a ‘ring-fence’ around the investment, ensuring protection from the wider company’s balance sheet. This means that if other developments of that company fail, it should have little or no impact on your investment.

Contract enforcement

A good property investment platform will have a number of controls in place to allow it to intervene in the event that a development doesn't perform or is in breach of contract. It will conduct ongoing monitoring to ensure that investment capital is used appropriately, is invested well, and is managed properly. If things are not progressing well, the platform should be able to enforce contracts through solicitors or even intervene itself. This can, of course, be expensive, so it can be an even better option for the commercial penalties to be written into contracts that can be invoked automatically when performance targets are missed.

Ensuring control

Problems can be headed off or at least mitigated before they even arise, if adequate monitoring and reporting systems are in place. One way an investment platform can achieve this is to ensure it has a the ability to sign off payments or costs. Another is to lend the funds raised in chunks, rather than all in one go, effectively allowing the investor to hold the purse strings. A good investment platform will also hold restrictions on assets to ensure that the investments cannot be sold without its knowledge.

So there’s plenty of protections that can and should be in place before a penny of your money is invested, and, if you’re investing through an asset manager, crowdfunder or property investment platform, it’s worth asking them whether they’re deploying the measures I’ve set out here. I’ll end by acknowledging that you can never eradicate risk entirely. But if you know the developer’s track record, know the people they’ve done business with and find them credible and reliable, then that is definitely a good start.

This article contains Brickowner’s opinions, based on the information that is available. Always seek the advice of a qualified independent financial adviser if you need advice. All investors should be aware that their capital will be at risk. The value of investments can go down as well as up. Forecasts are not a reliable indicator of future performance.